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Franklin Templeton Investments Corp. et al.
Headnote
National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- Exemptive relief from seed capital requirement, investment risk classification methodology requirement, and simplified prospectus, fund facts and sales communication disclosure requirements to permit a continuing fund to use certain disclosure of a terminating fund, and to calculate investment risk level using performance history of terminating fund -- National Instrument 81-101 Mutual Fund Prospectus Disclosure, National Instrument 81-102 Investment Funds.
Applicable Legislative Provisions
National Instrument 81-101 Mutual Fund Prospectus Disclosure, ss. 2.1 and 6.1.
National Instrument 81-102 Investment Funds, ss. 3.1, 15.3(2), 15.6(1)(a)(i)(A), 15.6(1)(b), 15.6(1)(d)(i), 15.8(2)(a), 15.8(3)(a), 15.9(2), 15.1.1 and 19.1.
August 21, 2020
IN THE MATTER OF THE SECURITIES LEGISLATION OF ONTARIO (the Jurisdiction) AND IN THE MATTER OF THE PROCESS FOR EXEMPTIVE RELIEF APPLICATIONS IN MULTIPLE JURISDICTIONS AND IN THE MATTER OF FRANKLIN TEMPLETON INVESTMENTS CORP. (the Filer) AND IN THE MATTER OF TEMPLETON GROWTH FUND (the Continuing Growth Fund), FRANKLIN MUTUAL GLOBAL DISCOVERY FUND II, FRANKLIN QUOTENTIAL DIVERSIFIED INCOME PORTFOLIO II, FRANKLIN U.S. MONTHLY INCOME FUND II AND TEMPLETON GLOBAL SMALLER COMPANIES FUND II (the New Continuing Trust Funds and with the Continuing Growth Fund, the Continuing Funds)
DECISION
Background
The principal regulator in the Jurisdiction has received an application from the Filer, on behalf of the Continuing Funds, for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) granting an exemption from:
(a) section 3.1 of National Instrument 81-102 Investment Funds (NI 81-102) to permit the filing of a simplified prospectus for the Continuing Funds (the Simplified Prospectus), notwithstanding that the initial investment required in respect of each of the Continuing Funds (the Seed Capital Requirement) will not be provided (the Seed Capital Relief);
(b) section 2.1 of National Instrument 81-101 Mutual Fund Prospectus Disclosure (NI 81-101) for the purposes of the following exemptions sought from Form 81-101F1 Contents of Simplified Prospectus (Form 81-101F1) and Form 81-101F3 Contents of Fund Facts Document (Form 81-101F3);
(i) Item 5(b) of Part B of Form 81-101F1 to permit the Continuing Growth Fund to disclose the series start dates of Templeton Growth Fund, Ltd. (the Terminating Growth Fund) as its series start dates in the Simplified Prospectus;
(ii) Item 9.1(b) of Part B of Form 81-101F1 to permit the Continuing Growth Fund to use the performance history of the Terminating Growth Fund to calculate its investment risk rating in the Simplified Prospectus;
(iii) Item 13.2 of Part B of Form 81-101F1 to permit the Continuing Growth Fund to use the financial data of the Terminating Growth Fund in making the calculation required under the subheading "Fund Expenses Indirectly Borne by Investors" in the Simplified Prospectus;
(iv) Item 2 of Part I of Form 81-101F3 to permit the Continuing Growth Fund to use the start date of each series of the Terminating Growth Fund in the "Date series started" box of the Quick Facts table in the fund facts documents of each series of the Continuing Growth Fund (the Fund Facts Documents);
(v) Item 3 of Part I of Form 81-101F3 to permit the Continuing Growth Fund to show the investments of the Terminating Growth Fund in the "Top 10 investments" and "Investment mix" tables in the Continuing Growth Fund's initial Fund Facts Documents;
(vi) Item 4 of Part I of Form 81-101F3 to permit the Continuing Growth Fund to use the performance history of the Terminating Growth Fund to calculate its investment risk rating in the Fund Facts Documents;
(vii) Item 5 of Part I of Form 81-101F3 to permit the Continuing Growth Fund to use the performance data of the Terminating Growth Fund in the "Average return", "Year-by-year returns" and "Best and worst 3-month returns" sections in the Fund Facts Documents; and
(viii) Item 1.3 of Part II of Form 81-101F3 to permit the Continuing Growth Fund to use the management expense ratio (the MER), trading expense ratio (the TER) and fund expenses of the Terminating Growth Fund in the "Fund expenses" section of the Fund Facts Documents;
(c) sections 15.3(2), 15.6(1)(a)(i)(A), 15.6(1)(b), 15.6(1)(d)(i), 15.8(2)(a), 15.8(3)(a) and 15.9(2) of NI 81-102 to permit the Continuing Growth Fund to use the performance data of the Terminating Growth Fund in sales communications and reports to securityholders of the Continuing Growth Fund (collectively, the Fund Communications); and
(d) section 15.1.1 of NI 81-102 to permit the Continuing Growth Fund to calculate its investment risk level using the performance history of the Terminating Growth Fund (together with paragraphs (b) and (c) above, the Past Performance Relief and together with the Seed Capital Relief, the Exemption Sought).
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):
(a) the Ontario Securities Commission is the principal regulator for this application; and
(b) the Filer has provided notice that section 4.7(1) of Multilateral Instrument 11-102 Passport System (MI 11-102) is intended to be relied upon in each of British Columbia, Alberta, Saskatchewan, Manitoba, Québec, New Brunswick, Newfoundland and Labrador, Nova Scotia, Prince Edward Island, Northwest Territories, Nunavut and Yukon (together with Ontario, the Jurisdictions).
Interpretation
Terms defined in National Instrument 14-101 Definitions and MI 11-102 have the same meaning if used in this decision, unless otherwise defined.
In addition, the following terms have the meanings set out below:
"Funds" means the Continuing Funds and the Terminating Funds;
"New Continuing Trust Funds" means Franklin Mutual Global Discovery Fund II, Franklin Quotential Diversified Income Portfolio II, Franklin U.S. Monthly Income Fund II and Templeton Global Smaller Companies Fund II;
"Terminating FTCCL Funds" means Franklin Mutual Global Discovery Corporate Class, Franklin Quotential Diversified Income Corporate Class Portfolio, Franklin U.S. Monthly Income Corporate Class, Franklin U.S. Monthly Income Hedged Corporate Class and Templeton Global Smaller Companies Corporate Class; and
"Terminating Funds" means Templeton Growth Fund Ltd., Franklin Mutual Global Discovery Corporate Class, Franklin Quotential Diversified Income Corporate Class Portfolio, Franklin U.S. Monthly Income Corporate Class, Franklin U.S. Monthly Income Hedged Corporate Class and Templeton Global Smaller Companies Corporate Class.
Representations
This decision is based on the following facts represented by the Filer:
The Filer and the Funds
1. The Filer is a corporation governed by the laws of Ontario with its head office in Toronto, Ontario.
2. The Filer is registered as an investment fund manager in Ontario, Quebec, Alberta, British Columbia, Manitoba, Nova Scotia, and Newfoundland and Labrador, as a mutual fund dealer, portfolio manager and exempt market dealer in each province of Canada and the Yukon, and as a commodity trading manager in Ontario.
3. The Filer is the investment fund manager of each Terminating Fund and will be the investment fund manager and trustee of each Continuing Fund upon creation.
4. The Terminating Growth Fund is a mutual fund corporation established under the laws of Canada, and the Terminating FTCCL Funds are classes of a mutual fund corporation established under the laws of Alberta.
5. Each Continuing Fund is, or is expected on its creation to be, an open-ended trust established under the laws of Ontario.
6. Each Terminating Fund is a reporting issuer under the applicable securities legislation in each of the Jurisdictions, is subject to NI 81-102 and has been a reporting issuer for more than 12 months.
7. Securities of each Terminating Fund are currently qualified for sale in each of the Jurisdictions under a simplified prospectus, annual information form and fund facts document each dated June 26, 2020 (collectively, the Offering Documents), each of which has been prepared in accordance with NI 81-101.
8. The Filer filed a preliminary simplified prospectus, annual information form and fund facts documents in each of the Jurisdictions on July 24, 2020 with respect to the Continuing Growth Fund and the New Continuing Trust Funds. The Filer will not begin distributing securities of the Continuing Growth Fund or the New Continuing Trust Funds prior to their applicable Merger (as defined below).
9. The Continuing Growth Fund and each New Continuing Trust Fund is expected to be a reporting issuer under the applicable securities legislation in each of the Jurisdictions and is expected to be subject to NI 81-102.
10. Neither the Filer, nor any of the Terminating Funds, are in default of securities legislation in any of the Jurisdictions.
11. Each Terminating Fund follows, and the Continuing Growth Fund and each New Continuing Trust Fund will follow, the standard investment restrictions and practices established under NI 81-102, except pursuant to the terms of any exemption that has been previously obtained.
The Mergers
12. The Filer proposes to merge the Terminating Growth Fund into the Continuing Growth Fund (the Growth Fund Merger) on a tax-deferred basis after close of business on or about Friday, November 13, 2020 (the Growth Fund Merger Date).
13. Subject to receipt of securityholder approval and the satisfaction of certain other conditions, the Filer proposes to merge each Terminating FTCCL Fund into the corresponding New Continuing Trust Fund (the FTCCL Merger, together with the Growth Fund Merger, the Mergers) on a tax-deferred basis after close of business on or about Friday, November 20, 2020 (the FTCCL Merger Date, together with the Growth Fund Merger Date, the Merger Dates), as follows:
Terminating FTCCL Fund
New Continuing Trust Fund
Franklin Mutual Global Discovery Corporate Class
Franklin Mutual Global Discovery Fund II
Franklin Quotential Diversified Income Corporate Class Portfolio
Franklin Quotential Diversified Income Portfolio II
Franklin U.S. Monthly Income Corporate Class
Franklin U.S. Monthly Income Fund II
Franklin U.S. Monthly Income Hedged Corporate Class
Franklin U.S. Monthly Income Fund II
Templeton Global Smaller Companies Corporate Class
Templeton Global Smaller Companies Fund II
14. The Mergers satisfy the pre-approval criteria set out in s. 5.6 of NI 81-102, and the Independent Review Committee of the Funds approved the Mergers at a meeting held on August 12, 2020.
15. The net assets (as at June 30, 2020) of each Terminating Fund are as follows:
Terminating Fund
Net Assets ('000)
Templeton Growth Fund Ltd.
$1,047,994
Franklin Mutual Global Discovery Corporate Class
$91,847
Franklin Quotential Diversified Income Corporate Class Portfolio
$817,961
Franklin U.S. Monthly Income Corporate Class
$73,303
Franklin U.S. Monthly Income Hedged Corporate Class
$22,467
Templeton Global Smaller Companies Corporate Class
$22,932
16. The series offered and series start dates of the Terminating Growth Fund are as follows:
Series Currently Offered by the Terminating Growth Fund
Date First Offered for Sale
Equivalent Series Offered by the Continuing Growth Fund
Series A
November 29, 1954
Series A
Series A (Hedged)
March 28, 2013
Series A (Hedged)
Series F
November 24, 2000
Series F
Series I*
November 24, 2000
Series I*
Series O
November 24, 2000
Series O
Series PF
June 15, 2015
Series PF
Series PA
January 25, 2019
Series PA
Series PA (Hedged)
January 25, 2019
Series PA (Hedged)
*Series I of the Terminating Growth Fund. is not available for purchase, except by existing investors who may continue to purchase up to the business day prior to the Growth Fund Merger Date. Series I of the Continuing Growth Fund will be capped in an identical manner.
17. Following its Merger, each Terminating Fund will be terminated on its Merger Date and will be dissolved as soon as reasonably possible thereafter.
18. The Continuing Growth Fund and each New Continuing Trust Fund is being created for the purpose of implementing the applicable Merger, and therefore:
(a) the securityholders of the Terminating Funds will have rights under securities legislation as securityholders of the Continuing Funds that are substantially similar in all material respects to the rights under securities legislation they had as securityholders of the Terminating Funds;
(b) the securityholders of the Terminating Funds will hold securities of the equivalent series of the corresponding Continuing Fund with the same aggregate net asset value that they held before as securityholders of the Terminating Funds;
(c) each Continuing Fund will have an investment objective and investment strategies that are substantially similar to the investment objective and investment strategies of the corresponding Terminating Fund;
(d) the portfolio manager of each Terminating Fund is the same as the portfolio manager of the corresponding Continuing Fund;
(e) each Continuing Fund will have a valuation procedure that is identical to the valuation procedure of the corresponding Terminating Fund; and
(f) the management fees and administration fees attached to each series of each Continuing Fund will be the same as the management fees and administration fees for each corresponding series of the corresponding Terminating Fund and thus there will be no change to the fee or expense structure as a result of the Merger that will have a material impact on securityholders of a Terminating Fund who will become securityholders of the corresponding Continuing Fund.
19. As a result, notwithstanding the Mergers, the Continuing Funds will be managed in a manner which is substantially similar in all material respects to the manner in which the Terminating Funds have been managed.
Seed Capital Relief
20. The Filer does not intend to subscribe for $150,000 of securities of each Continuing Fund as required by the Seed Capital Requirement because the assets of the corresponding Terminating Fund (which will become the assets of that Continuing Fund in connection with the implementation of the applicable Merger) are significantly in excess of the $150,000 Seed Capital Requirement. Accordingly, the Filer is of the view that any seed capital injected into a Continuing Fund prior to a Merger will not provide any additional benefit to securityholders.
21. On the relevant Merger Date, securityholders of a Continuing Fund will hold securities of that Continuing Fund equal to the same net asset value as they did before as securityholders of the corresponding Terminating Fund, and therefore, the Continuing Funds will each have already received subscriptions in excess of $150,000.
Past Performance Relief
22. Subject to receipt of the Seed Capital Relief, the Continuing Growth Fund will not have any assets (other than a nominal amount to establish it) or liabilities at the time of the Growth Fund Merger.
23. The assets of the Terminating Growth Fund will be transferred to the Continuing Growth Fund in connection with the implementation of the Growth Fund Merger.
24. As the Filer intends to cease distribution of units of the Terminating Growth Fund at the close of business on the business day prior to the Growth Fund Merger Date, it does not intend to renew the Terminating Growth Fund's simplified prospectus and annual information form after the lapse date.
25. The Continuing Growth Fund will be a new fund. While the Continuing Growth Fund will have the same assets and liabilities as the Terminating Growth Fund, as a new fund, it will not have its own financial data and performance history (collectively, the Financial Data) as at the Growth Fund Merger Date.
26. The Financial Data of the Terminating Growth Fund is significant information which can assist investors in determining whether to purchase securities of the Continuing Growth Fund. In the absence of the Past Performance Relief, investors will have no historical financial or performance information (such as past performance) on which to base such an investment decision.
27. Without the Past Performance Relief, the sales communications pertaining to the Continuing Growth Fund cannot include performance data that relates to a period prior to the Growth Fund Merger and the Continuing Growth Fund cannot provide performance data in its sales communications until it has distributed securities under a simplified prospectus for at least 12 months.
28. The Filer proposes to:
(a) disclose the series start dates of the Terminating Growth Fund as the series start dates of the Continuing Growth Fund:
i. in the "Fund Details" table in Part B of the Simplified Prospectus; and
ii. under the subheading "Date series started" under the heading "Quick Facts" in the Fund Facts Documents;
(b) use the performance data of the Terminating Growth Fund to calculate the risk rating of the Continuing Growth Fund in:
i. the Simplified Prospectus; and
ii. the Fund Facts Documents;
(c) use the performance data of the Terminating Growth Fund in:
i. the Fund Communications of the Continuing Growth Fund; and
ii. the "Average return", "Year-by-year returns" and "Best and worst 3-month returns" subsections of the Fund Facts Documents for the Continuing Growth Fund;
(d) use the MER of the Terminating Growth Fund for the purposes of calculating the information required under the subheading "Fund Expenses Indirectly Borne by Investors" in Part B of the Simplified Prospectus for the Continuing Growth Fund;
(e) show the investments of the Terminating Growth Fund in the "Top 10 investments" and "Investment mix" tables in the initial Fund Facts Documents for the Continuing Growth Fund;
(f) use the MER, TER and fund expenses of the Terminating Growth Fund in the "Fund expenses" section of the Fund Facts Documents for the Continuing Growth Fund; and
(g) incorporate by reference into the Simplified Prospectus the most recent annual financial statements and management reports of fund performance (MRFPs) of the Terminating Growth Fund for the period ended April 30, 2019, and the most recent interim financial statements and MRFP of the Terminating Growth Fund for the period ended October 31, 2019 (collectively, the Terminating Growth Fund Disclosure), until such Terminating Growth Fund Disclosure is superseded by more current financial statements and MRFPs of the Continuing Growth Fund.
29. The Filer is seeking to make the Growth Fund Merger as seamless as possible for investors of the Terminating Growth Fund. Accordingly, the Filer submits that treating the Continuing Growth Fund as fungible with the Terminating Growth Fund for purposes of the starting dates, investment holdings and Financial Data would be beneficial to investors and that to do otherwise would cause unnecessary confusion among investors concerning the difference between the Terminating Growth Fund and the Continuing Growth Fund.
30. The Filer submits that investors will not be misled if the starting dates, investment holdings and Financial Data of the Continuing Growth Fund reflects the starting dates, investment holdings and Financial Data of the Terminating Growth Fund.
31. The Filer has filed a separate application for exemptive relief from certain provisions of National Instrument 81-106 Investment Fund Continuous Disclosure to permit the Continuing Growth Fund to prepare annual and interim MRFPs using the Terminating Growth Fund's financial highlights and past performance (the NI 81-106 Relief).
Decision
The principal regulator is satisfied that the decision meets the test set out in the Legislation for the principal regulator to make the decision. The decision of the principal regulator under the Legislation is that:
1. the Seed Capital Relief is granted; and
2. the Past Performance Relief is granted, provided that:
(a) the Fund Communications include the applicable performance data of the Terminating Growth Fund prepared in accordance with Part 15 of NI 81-102;
(b) the Simplified Prospectus:
(i) incorporates by reference the Terminating Growth Fund Disclosure, until such Terminating Growth Fund Disclosure is superseded by more current financial statements and MRFPs of the Continuing Growth Fund;
(ii) states that the start date for each series of the Continuing Growth Fund is the start date of the corresponding series of the Terminating Growth Fund; and
(iii) discloses the Growth Fund Merger where the start date for each series of the Continuing Growth Fund is stated;
(c) the Fund Facts Document of each series of the Continuing Growth Fund:
(i) states that the "Date series started" date is the "Date series started" date of the corresponding series of the Terminating Growth Fund;
(ii) includes the performance data of the Terminating Growth Fund prepared in accordance with Part 15 of NI 81-102; and
(iii) discloses the Growth Fund Merger where the "Date series started" date is stated; and
(d) the Continuing Growth Fund prepares its MRFPs in accordance with the NI 81-106 Relief.
"Darren McKall"
Manager, Investment Funds and Structured Products
Ontario Securities Commission